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Arbitrage and the Price of Oil

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  • Vipin Arora

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Abstract

The model simulated in this paper shows that falling interest rates contribute to rising oil prices. This occurs because oil producers treat oil in the ground as an asset and attempt to arbitrage differences between its rate of return and the interest rate. When calibrated to match observed data over the last two decades, model results indicate that this arbitrage behaviour may have made the largest contribution to the pre-crisis boom in oil prices. Productivity driven growth shocks raise the oil price by about 70 percent, but this rises to 150 percent when falling interest rates are included.

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Bibliographic Info

Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANU Working Papers in Economics and Econometrics with number 2011-535.

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Length: 27 Pages
Date of creation: Jan 2011
Date of revision:
Handle: RePEc:acb:cbeeco:2011-535

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  1. Jeffrey A. Frankel, 2008. "The Effect of Monetary Policy on Real Commodity Prices," NBER Chapters, in: Asset Prices and Monetary Policy, pages 291-333 National Bureau of Economic Research, Inc.
  2. Peter B. Dixon & Maureen T. Rimmer, 2009. "Forecasting with a CGE model: does it work?," Centre of Policy Studies/IMPACT Centre Working Papers g-197, Victoria University, Centre of Policy Studies/IMPACT Centre.
  3. James D. Hamilton, 2008. "Understanding Crude Oil Prices," NBER Working Papers 14492, National Bureau of Economic Research, Inc.
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  6. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
  7. Vipin Arora, 2011. "Asset Value, Interest Rates and Oil Price Volatility," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 87(s1), pages 45-55, 09.
  8. Steven Pennings & Rod Tyers, 2008. "Increasing Returns, Financial Capital Mobility and Real Exchange Rate Dynamics," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 84(s1), pages S141-S158, 09.
  9. Kilian, Lutz & Rebucci, Alessandro & Spatafora, Nikola, 2009. "Oil shocks and external balances," Journal of International Economics, Elsevier, Elsevier, vol. 77(2), pages 181-194, April.
  10. Codsi, George & Pearson, K R & Wilcoxen, Peter J, 1992. "General-Purpose Software for Intertemporal Economic Models," Computer Science in Economics & Management, Society for Computational Economics, vol. 5(1), pages 57-79, February.
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Cited by:
  1. Vipin Arora, 2011. "Asset Value, Interest Rates and Oil Price Volatility," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 87(s1), pages 45-55, 09.
  2. Rod TYERS, 2013. "China and Global Macroeconomic Interdependence," CAMA Working Papers 2013-34, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  3. Rod Tyers, 2014. "International Effects of China’s Rise and Transition: Neoclassical and Keynesian Perspectives," CAMA Working Papers 2014-05, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  4. Arora, Vipin & Tanner, Matthew, 2013. "Do oil prices respond to real interest rates?," Energy Economics, Elsevier, Elsevier, vol. 36(C), pages 546-555.

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